FMCG sales see 12% growth in rural markets, 7% rise in food and beverages category in July

Consumption of groceries and daily essentials picked up sharply in July, helped by pent-up demand from traders after orders had been slashed in June and blunted competition from unbranded products that struggled to reach retail shelves due to difficulties in goods and services tax (GST) compliance, especially in rural markets.

Fast-moving consumer goods (FMCG) sales by volume — or an actual number of products sold — rose 6 per cent in July, faster than 2 per cent a year ago, according to the latest data by Kantar Worldpanel, the consumer insights arm of WPP. This was mainly driven by 12 per cent growth in rural areas and a 7 per cent rise in the food and beverages category that has a significant chunk of unbranded players. A year ago, both segments grew 2 per cent each.

‘More Compliant Environment’

“It’s been driven by a catchup from the significant destocking that the industry saw, along with some benefits from government investments in the rural economy and the impact of a good monsoon,” said Vivek Gambhir, managing director, Godrej Consumer Products Ltd.

“The implementation of GST will usher in a more compliant environment. Players who don’t adapt to play by the rules will struggle over time.”

GST was rolled out on July 1.

Most consumer product companies reported tepid sales growth in the April-June period despite healthy consumer demand, because of destocking by trade, especially wholesalers and retailers that purchased limited inventory in the run-up to the new tax system.

Companies don’t see the July sales uptick as a temporary aberration. To counter the impact of the currency swap announced in November last year, finance minister Arun Jaitley had announced several incentives built around farm infrastructure and credit for rural and low-income consumers.

“While we see more players getting organised or regularised, consumer demand is generally improving with the positive monsoon since last year,” Dabur India chief financial officer Lalit Malik said. “While the growth may not be as high as July, which was backed by the pipeline getting stronger, we are seeing positive numbers even in August.”

Under GST, the receiver of goods becomes liable to pay taxes if unpaid by the supplier, making things difficult for unbranded players. For years, local brands have been nibbling away share from leading consumer product companies, especially in food, where more than 500 unorganised players operate in each sub-segment. This seems to be changing and the numbers bear witness.

Two of the largest sub-segments — biscuits and snacks — grew 15 per cent and 11 per cent, respectively, in July. A year ago, these categories grew 11 per cent and 2 per cent, respectively.

“We see a few mid-sized players trying to get compliant after GST. But several smaller ones which thrived by avoiding taxes are now struggling,” said B Krishna Rao, category head at Parle Products. “The more sustainable growth numbers will take a few more months.”

Analysts expect that the GST upside for most large FMCG companies will extend beyond gains in market share from the unorganised sector after partial retention of net indirect tax — a combination of output tax and input tax credits — which will benefit them in terms of cost of operations.

“Apart from retailers restocking goods, there were benefits from farm loan waivers and the good monsoon, which helped growth,” Edelweiss Securities senior vice president Abneesh Roy said.

“There were similar indications of a revival in October last year that was derailed by demonetisation.”

Unilever CEO Paul Polman told ET last week that India unit Hindustan Unilever has seen its successful GST implementation translate into increased market share. “We have implemented this despite the struggle other companies seem to have,’’ he had said.